Accrued income is money you have earned but have not yet received in cash. A consultant who finishes a project in March but will not be paid until April has accrued income in March. A bondholder earns interest every day the bond is held, even when the issuer only sends payments twice a year. The gap between earning the money and collecting it creates the accounting entry, and for businesses on the accrual method it also decides when the income hits the tax return.
When Accrued Income Matters to You
Most individuals never think about accruing income. If you file a personal return with wages, dividends, and some side work, you almost certainly use the cash method: you record income when the money arrives and expenses when they leave your account. Accrued income becomes a live concern when the tax code requires you to use accrual accounting.
Under accrual accounting, you record income the moment you earn it and expenses the moment you owe them, regardless of when cash changes hands. A consulting firm that delivers a report on June 15 books that revenue in June, even if the client does not pay until August. The point is to match earnings with the work that produced them in the same reporting period, so a productive month is not made to look unprofitable by slow-paying clients.
Three categories of entities generally cannot use the cash method:
- C corporations
- Partnerships that have a C corporation as a partner
- Tax shelters
There is a large exception. A C corporation or qualifying partnership with average annual gross receipts of $32 million or less over the prior three tax years can still use the cash method for 2026.1Office of the Law Revision Counsel. 26 U.S. Code 448 – Limitation on Use of Cash Method of Accounting The base amount is adjusted annually for inflation; the IRS set the 2025 threshold at $31 million.2Internal Revenue Service. Revenue Procedure 2024-40 Farming businesses and qualified personal service corporations (accounting firms, law practices, engineering firms) are exempt from the accrual requirement regardless of size. Businesses that sell merchandise and keep inventory generally must use the accrual method for their sales and purchases, though the same small-business gross receipts exception applies.3Internal Revenue Service. Tax Guide for Small Business
Where Accrued Income Comes From
Interest and Bond Income
Interest-bearing investments are the classic source. A bond that pays interest semiannually generates earnings every day, but the holder only sees cash twice a year. The interest earned between payment dates is accrued income. The same logic covers certificates of deposit, savings accounts with periodic payouts, and loans you have made to others.
Original issue discount, or OID, catches people off guard. When a bond is issued below face value, the gap between what you paid and what you will receive at maturity is treated as interest that accrues over the bond’s life. You report a portion of that discount as income each year you hold the bond, even though the cash does not arrive until maturity or sale. The IRS carves out exceptions for U.S. savings bonds and loans under $10,000 between individuals who are not in the lending business.4Internal Revenue Service. Guide to Original Issue Discount (OID) Instruments
Rent and Service Revenue
A landlord recognizes rental income as the tenant uses the space, before the check arrives. Contractors and service providers work the same way: a web developer who delivers a finished site has earned the contract revenue on the delivery date, even if the client has 30 or 60 days to pay.
Dividends
Dividend income accrues based on dates set by the issuing company. The record date determines who is on the books as a shareholder and therefore entitled to the payment.5Investor.gov. Ex-Dividend Dates: When Are You Entitled to Stock and Cash Dividends For accrual-method taxpayers, the income is recognized on the record date, not the payment date.
Long-Term Projects
Construction companies, software developers, and other businesses working on multi-period contracts accrue revenue based on how much of the work is complete. A contractor who has finished 40% of a building project recognizes 40% of the contract price as revenue, even if the client will not pay until completion. Progress can be measured by costs incurred against total expected costs, milestones reached, or units delivered.
When the IRS Considers Accrued Income Earned
For accrual-method businesses, Section 451 of the Internal Revenue Code sets the timing. Income is included in gross income for the year your right to receive payment becomes fixed and the amount can be determined with reasonable accuracy.6Office of the Law Revision Counsel. 26 U.S.C. 451 – General Rule for Taxable Year of Inclusion This is the all events test. Whether the money is available to withdraw is irrelevant; what matters is whether the earning event has happened and you can put a number on it.7eCFR. 26 CFR 1.451-1 – General Rule for Taxable Year of Inclusion
A cash-basis freelancer who sends a December invoice and gets paid in January reports the income in January. An accrual-basis business sending the same December invoice reports it in December. Cash-basis taxpayers follow a different rule called constructive receipt, which treats income as taxable once it is credited or made available to you.8eCFR. 26 CFR 1.451-2 – Constructive Receipt of Income
Section 451 also contains a financial-statement coordination rule. If you report an item as revenue on your financial statements, the all events test is treated as met no later than that point for tax purposes. You cannot book revenue for investors while telling the IRS you have not earned it yet.
Documentation is what backs up the timing: signed contracts, invoices, service completion records, delivery confirmations, and milestone sign-offs. Anything showing the work was done and the amount was determinable supports your position if the IRS questions when you recognized the income.
How Accrued Income Is Recorded
On the balance sheet, accrued income sits as a current asset, typically labeled “accrued receivables” or “accrued revenue.” The business has a right to money someone owes, so it is an asset even before cash arrives. The matching entry goes to a revenue account on the income statement, increasing reported earnings for that period.
The journal entry is a debit to accrued revenue and a credit to the relevant income account (sales revenue, interest income, or whatever fits). When the cash comes in, you reverse the accrual: debit cash, credit accrued revenue. The income statement already captured the earnings in the correct period, so the cash receipt is an asset swap on the balance sheet.
The reversal is where mistakes happen. If you accrue $15,000 of consulting revenue in April but the client pays in May, you need to reverse the April accrual at the start of May before recording the cash. Skip the reversal and you double-count the revenue, which inflates earnings and creates audit problems. Most accounting software automates reversing entries, but knowing the mechanics helps you catch errors the software misses.
When Accrued Income Never Gets Paid
The bitter side of accrual accounting: you already reported the income and paid tax on it, but the client never pays. Section 166 provides a bad debt deduction for this situation. The deduction requires a genuine debt, meaning a real obligation to pay a fixed amount under an enforceable agreement. Unpaid fees, rent, and other income already reported on a return qualify, but only if you actually included the income on the return for the year you claim the deduction or a prior year.9eCFR. 26 CFR 1.166-1 – Bad Debts
Business bad debts can be deducted in full as ordinary losses. The IRS also allows partial deductions when you can show a debt is only partly recoverable. Nonbusiness bad debts are treated as short-term capital losses, which limits how much you can offset against ordinary income in a given year.10Office of the Law Revision Counsel. 26 U.S. Code 166 – Bad Debts
On the accounting side, writing off an uncollectible receivable removes the asset from your balance sheet. If your business maintains an allowance for doubtful accounts, the write-off reduces that allowance rather than hitting current-period expenses. Without an allowance, the write-off flows through as bad debt expense in the period you determine the amount is worthless. Either way, you need documentation of your collection efforts and the basis for concluding the debt is uncollectible. Vague claims that a client “probably will not pay” do not hold up.
Penalties for Getting the Timing Wrong
Understating income, whether by failing to accrue it or by pushing it into the wrong year, has real cost. The accuracy-related penalty is 20% of the underpaid tax when the understatement results from negligence or a substantial understatement of income.11Office of the Law Revision Counsel. 26 U.S.C. 6662 – Imposition of Accuracy-Related Penalty on Underpayments A “substantial understatement” for most businesses means the understatement exceeds the greater of 10% of the correct tax or $5,000.
Willful evasion is a separate matter. Deliberately attempting to evade tax is a felony punishable by up to five years in prison and fines up to $100,000 for individuals or $500,000 for corporations.12Office of the Law Revision Counsel. 26 U.S.C. 7201 – Attempt to Evade or Defeat Tax The line between a timing mistake and willful evasion is intent, but consistently failing to accrue substantial amounts of income makes an honest-mistake argument harder to defend.